Is There a Duty to Renegotiate Contracts in Cases of Hardship?
In Churchill Falls (Labrador) Corporation Ltd c Hydro-Québec, 2016 QCCA 1229 (English translation here), the Quebec Court of Appeal seemed to contemplate that there may exist a duty to renegotiate a long-term contract where unforeseen circumstances arise which amount to hardship; however, the Court found the facts of the case did not give rise to such a situation so there could be no obligation to renegotiate the contract at issue.
The dispute related to a power contract signed in 1969 between Hydro-Québec and the Churchill Falls (Labrador) Corporation Limited (“CFLCo”) whereby CFLCo agreed to supply, and Hydro-Québec agreed to purchase, substantially all of the power produced by the Churchill Falls Generating Station for a total term of 65 years. Following the execution of the contract, the price paid by Hydro-Québec turned out to be markedly lower than the commercial value of the power generated, as a result of increases in energy prices and the emergence of competitive energy markets in North America, although the contract remained marginally profitable for CFLCo.
The Court of Appeal affirmed the first instance judgment which denied CFLCo’s request for the renegotiation and modification of the contract to provide for payment of a more equitable price (i.e., indexation of the price to the average sales and export prices of Hydro-Québec). The Court of Appeal also denied CFLCo’s alternative request for termination of the contract. Given the factual conclusions of the lower court that the parties knew that future prices were a ‘known unknown’ and that CFLCo assumed the risk of price increases, the Court of Appeal ruled that Hydro-Québec did not have a duty, based in contractual good faith, to renegotiate the power contract.
The Court of Appeal, however, did examine how the duty of good faith might apply in cases of hardship (imprévision), where unforeseeable events fundamentally alter the equilibrium of a contract, either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished. The refusal to include in the Civil Code of Québec a provision allowing courts to revise or terminate contracts in cases of hardship, as the Civil Code Revision Office had proposed, does not prevent a party from invoking the duty of good faith to resolve a contractual imbalance in cases of hardship. Citing Bhasin v Hrynew, 2014 SCC 71 for the proposition that the development of rules underpinned by good faith occurs incrementally, the Court indicated that the general principles codified in the Civil Code of Québec remain at the disposal of ingenious litigators to argue that a remedy similar to the one sought by CFLCo in this case could be appropriate in other circumstances.
Certain components of the duty of good faith, which has been developing as a general contract principle in Québec since the 1980s, were also clarified by the Court of Appeal. The first component of the duty of good faith is a duty of cooperation, which requires a party to safeguard the interests of the other party. However, the duty of cooperation does not oblige a party to sacrifice that to which it is entitled during the performance of the contract in order to best serve the interests of the other party. This is especially true in a relationship between sophisticated, well–advised parties that intensively negotiated a high–stakes and complex contract.
The second component of the duty of good faith analysed by the Court is a bundle of prohibitive rules regrouped under the notion of a duty of loyalty—distinct from the fiduciary duties recognized at common law. At issue was the prohibition to engage in excessive and unreasonable conduct, including by taking advantage of a situation to gain an unfair advantage. The Court of Appeal held that, in circumstances of hardship, this prohibition on excessive and unreasonable conduct only prohibits the advantaged party from refusing an objectively reasonable and non-prejudicial concession to the disadvantaged party.
The cases dismissing ambitious arguments are sometimes, paradoxically, the most innovative. Despite refusing to revise the high–stakes contract in Churchill Falls (Labrador) Corporation Ltd c Hydro-Québec, the Québec Court of Appeal may still have sowed the seeds of a duty to renegotiate a contract in cases of hardship.
Churchill Falls (Labrador) Corporation Ltd c Hydro-Québec, 2016 QCCA 1229 (English translation here)
Date of Decision: August 1, 2016
contractual good faith duty to renegotiate a long-term contract power contract Quebec Court of Appeal